Tough Times Demand Smart Action

July 01, 2008

Clearly, we are in a season of large-type headlines regarding the national economy.

Both gas and food prices and unemployment levels are rising. The value of the dollar, property values, and the number of new jobs created are falling. It's a disquieting mix.

While economists and columnists debate whether or not the rise in retail sales in May was the result of the $50 billion in tax rebate checks received by Americans, consumers are voting every day with their credit cards and at the checkout counter. The domestic market for trucks and SUVs has evaporated, and Americans are buying more Big Macs and Spam (the sales of which were up almost 11 percent over the last quarter).

Given the likely economic uncertainty for the next several months, it seems a good time to reprint an insightful piece from September 2001 by former ABA President Neal Coonerty. While some things have changed -- gift certificates are now gift cards -- the piece still offers a number of important suggestions on how to prepare your business for tough times.

Tough Times Demand Smart Action

By Neal Coonerty

Independent bookstores, like all retailers, are facing a season that may be very tough financially. The U.S. economy is soft ... [and] some experts predict an even bleaker future for retail sales. Here are some suggestions on how to prepare your business for tough times.

It is a critical responsibility of leadership to see problems, to articulate them clearly, and to point a way for a solution. It seems like a simple dictum. However, when tough times come to a business, denial sometimes seems comforting. You, as the owner or manager of an independent bookstore, are already working very hard and may feel as though you are barely able to keep on top of the demands of your store now. When sales start a sustained and significant decline, a typical reaction may be to pretend it isn't really happening. Denial is very comforting right up until the point you go under.

When the 1989 earthquake destroyed the building my bookstore was in, I was not able to deny such a dramatic reality. I was forced to act immediately, and it turned out to be critical to act decisively and quickly.

As sales drop, you might just feel you only need to put your shoulder to the existing wheel and work even harder. That may help, but as the world changes, it is time to take a hard look at your bookstore and to change the way you and your staff work.

During a sales downturn, cash is king. Fewer sales bring in less cash. There are three places other than sales to look for the cash that you need to sustain the store through tough times: a line of credit, a tighter inventory, and reduced expenses.

First, consider going to your bank to secure a larger line of credit. Before a Borders superstore opened a block away from my store last year, we approached our bank and negotiated a 300 percent increase in our line of credit. We are careful about using it -- it is not a capital loan, but a revolving line of operational credit available to ensure timely delivery of inventory and payment of operational expenses. It meant that our bookstore had the necessary cash to operate and also would have the right inventory, even in the face of a sales decline.

Banks understand that businesses need larger lines of credit when tough times come. For a small business, they may require that you guarantee your line of credit on real property, such as your house. That is always a very tough call, but if you decide to put your house on the line, you should have a very clear road map of how you are going to get through a temporary economic downturn.

Second, you must focus and tighten your inventory. The excuse to avoid tightening inventory is that you desperately don't want to lose a sale or disappoint a customer.

Please understand that you have no choice. Lower sales volume demands a smaller inventory. However, now is an opportunity to retrain and refocus your staff on offering and taking special orders. Make sure that every time a customer asks for a title that you don't carry, your staff dedicates themselves to getting that customer that book. Call other independent bookstores and redirect the customer. Order more frequently from wholesalers. Get your staff together and brainstorm how to talk to your customers and to go the extra mile for them.

Also, examine where your inventory dollars are. Will a dollar spent on a well-priced remainder return more than a magazine dollar? We are very aware at Bookshop Santa Cruz that [gift card sales] are the best markup in the store -- they are sold at full price and a significant percent never come back for redemption. [Gift card sales] also act like a short-term, free loan: You have use of the cash before the certificates are redeemed for merchandise. So, work with your staff to promote [gift cards] especially during the holiday season.

Every experienced bookseller also knows that there are unproductive books on their shelves. Process returns frequently. When Bookshop Santa Cruz was going through very tight cash times, we assigned a turnover rate for each section of the store. Maybe literary criticism was assigned a twice-a-year turnover rate, while paperback fiction was expected to turn five times.

We estimated our sales by section for the next three months and calculated a goal level of inventory for each section based on their assigned turnover. Then, we printed out our actual inventory section levels, using our computerized inventory control system, and compared our inventory goals with the actual, existing inventory levels. We were able to target specific sections that were over-inventoried for returns. It also told us sections where the inventory had gotten too low. But, mainly, it gave us the monthly discipline to get our inventory as tight and as smart as possible. Cash is king, and smart inventory control is your key to the kingdom.

Finally, smart business owners frequently revisit their pricing policies. Bookstore owners are no different, especially during tough economic times. Neither ABA nor I can tell you how you should price your merchandise; every business sets its own prices. However, it's always important to analyze your competitive position in your marketplace. It may or may not be the right time to reduce your discounts or to reduce the number of books you discount. I have no advice on how you should price your merchandise, but I do believe that it is a good business practice to take a close look at all the financial aspects of your business.

Another place to get cash is by reducing expenses. It is mandatory to take a close look at all your expenses because you will have less cash available from lower sales and your cost of goods sold may rise as you order more frequently and in smaller quantities. Some costs are fixed -- rent and utilities -- and others are more discretionary. Your main expense, after acquiring inventory, is payroll.

Be careful about cutting payroll costs, although it may ultimately be necessary. Your staff is your team. Your store's selection and customer service -- one hopes excellent customer service -- is what will get you successfully through economic bad times.

My pledge to my staff after the earthquake and during tough times was that I would only reduce pay levels and implement layoffs after I had worked to reduce all other expenses first.

They had to feel confident that their hourly rate, already modest, was secure. It was also important to them that during tough times I recognized their contribution and importance to the business. Reduction of staff by attrition was acceptable -- everyone knew that we were all going to have to work harder -- but letting people go or paying less needed to be a management action of last resort. But, make no doubt about it, the time may come when layoffs and pay rate reductions are necessary. If the staff know that you did everything possible to avoid these actions, then they will feel better about maintaining their loyalty to the business.

To examine expenses, go through all your monthly checks that pay operational costs. Ask yourself a question about each one. Is now the time to pledge to reduce the size of your Yellow Pages ad or to eliminate other advertising? Can you sustain your ambitious events calendar during these times? Is it time to restrict store donations to modest gift certificates only? Is it time to seriously reduce team sponsorships and National Public Radio sponsorships? Are store hours right or can you eliminate unproductive hours without confusing customers?

Many of these programs are the very ways we define our stores in our community and reducing or eliminating them is very tough. But, after analysis, it may have to be done. And the analysis must be carried out.

People in the community will understand, and you can reinstate programs when times improve. It is more important to your community that it continues to have access to a good and financially healthy independent bookstore.

Do this important exercise now: Assume a 10 percent or a 15 percent reduction in sales. If you do $750,000 in sales that means, at best, your store will lose $75,000 in sales. This means that your store will have about $30,000 less annually as a contribution to paying your overhead.

Ask yourself where you will find that $30,000. Reduce your profit goals. Reduce expenses. Reduce payroll dollars through attrition. Take the pressure off your accounts payable by reducing your inventory in a smart way. Cover your cash needs with a line of credit. It may be that a temporary goal for your business becomes survival rather than profitability.

But, most of all, work with your staff on how your business can improve for your customers and for them. Listen and lead. Don't just be a cheerleader, but be a player and take smart action. Sure, you may make mistakes -- above my desk hangs a quote, "Fall down six times, get up seven" -- but you will ensure that your bookstore survives.

My staff and I were able to survive an earthquake, operating three years in a tent, personal loss, recessions, and a superstore locating one block away. And once we survived, we were in a position to prosper. If you take action now, you will also guarantee that when your sales start to grow again, your lean business operation will be able to translate every new dollar into real profits.

Good luck, and let's hope that books remain a great holiday gift idea during our nation's tough times.

Neal Coonerty is currently a Santa Cruz County supervisor. He has been the mayor of Santa Cruz and a city councilman, as well as an ABA president and board member. In November 2006, Coonerty celebrated the 40th anniversary of Bookshop Santa Cruz and passed store management to his daughter, Casey Coonerty Protti.

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